Important information on home loans

Introduction

Since the last one year home loans have become costlier. The interest rates have increased. This is because of stringent rubles by the Reserve Bank of India. Therefore it is better to plan before taking a Home Loan. There are two types of interest rates for home loans namely floating rates and fixed rates. Fixed rate means there is one fixed interest rate for the entire duration of the loan. In floating rates the interest rates varies.

Fixed rates vs floating rates

The irony is that these days fixed rates are not fixed and floating rates are not as floating as they appear to be. Some people who have taken home loans on fixed rates have been informed that now they have to pay a higher EMI. On investigation they find that as per the signed agreement the bank has the right to increase the fixed rates. These days banks charge a fixed rate for a period of three years and then increase the rates. Therefore it is important to read all the terms and conditions carefully before applying for a home loan. Assume that a person takes a home loan on a fixed rate. He decides the interest rate to be 6%. After 3 years there is a revision and then he has to pay 8% interest. This will feel bad to the person but he is still paying 4% lower interest as compared to floating rates. Those who take floating rates usually see that the interest rates have not gone down even after a period of 3 years. They take a floating rate at 7% and later find themselves paying interest rates of 12%.

Therefore, if you have no idea about market rates, always go for the fixed rates option when applying for a home loan. If you have a good knowledge about market rates and can foresee that the market rates will fall, go for floating rates. There is another option called called 'hybrid loan' in which a certain portion of your loan is converted into floating rates and certain portion into fixed rates of interest. However leave this option if you are not sure of what you are getting into.

How much loan you can expect

How much home loan you will get depends on your repayment capacity of the loan. There are three factors that determine how much home loan you can get. These are-

IIR(Installment to Income Ratio). As per IIR the bank determines how much EMI per month you can pay. This is usually fixed at 50% of your salary. For example if you earn 2 lakhs a month your EMI will not be more than one lakh a month.

FOIR(Fixed Obligation to Income Ratio). As per FOIR the bank takes into account the previous loans you have taken and are in the process of repayment. The bank will use this to determine how much home loan you will be sanctioned. For example your salary is 50,000 per month and you are paying loans upto 15 thousand a month, your home loan EMI cannot exceed 20,000.

CR(Cast Ratio). As per cast ratio if you use your property to take a home loan, the bank looks at what the market value of your property is. The bank grants a home loan upto 70% of the market value of your property.

Additional information on Home Loans

Equated Monthly Installments(EMIs). This is the financial term for your home loan. You repay your loans through EMIs. EMIs have the principal and interest rates included in them. EMIs are calculated on the basis of the tenure of the loan and the interest rates.

LTV and LCR. LTV means loan to value ratio. LCR means loan to cast ratio. These are taken into account when you take a home loan on your property.

IC. IC means incidental charges. These are the extra charges on your home loan fixed by the bank as penalty if you do not pay the EMIs on time.

NOC. This is demanded by the bank when a person takes a home loan to construct a home on someone else's property.

Pre-EMI. These have to paid some time after you start paying your EMIs. These are charged intermittently once you start your home construction. EMIs once started cannot be stopped and pre EMIs will also be charged every now and then.

PF. One has to fill an application form for the home loan. There is a processing fees involved which is termed Processing Fees.

PPC. This means pre payment charges or pre payment penalty. This is charged if the borrower pays of the entire loan before the stipulated time. This is because there is a loss of interest rates to the bank.

PDC. This means post dated cheques. Post dated cheques cannot be en-cashed ahead of time. The bank demands post dated cheques up to a period of one year from you. Sometimes PDCs up to a period of 2-3 years can also be demanded.

other expenses involved

Application Fees. This is a small non refundable amount that the bank charges when it gives the loan application to you.

Processing fees. This is a fees charged to examine your documents, credit report, property and information on your previous loans. A number of people in the banks like Legal Experts, Finance Experts and Administrative Staffs are employed by the banks to verify these.

Pre Payment Penalty. Most people want to clear off their home loans as soon as possible. If they somehow get a big amount in their hands they want to clear of their home loans entirely. This causes a loss of interest to the bank. The bank compensates for this by charging Pre Payment Penalty.

Why are loans rejected?

Why are home loans rejected? The bank checks your background once you apply for a home loan. Causes for rejection can be bad credit history, giving false information to the bank, temporary job, lack of ratio between loan applied for and income, application form filled wrongly etc. The property on which you propose to construct your home should be legal. If one applies for a higher amount not suited to one's income, the loan can be rejected. The loan EMI should not be more than 50% of your income. People who show a higher salary than they actually get can get their loan rejected. Failure to produce the required documents can also cause loan rejection.

Important documents required

Documents relating to age proof, photo id, 3 months salary slip, 6 months bank statement, residential address proof etc are required. For self employed people income tax returns, auditor reports and balance sheets and loss profit statements are required. Every ban has its own rules and regulations to pass or reject your loan. If one bank rejects your loan, another one may approve it.